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fannie mae 2008 Third Quarter Earnings
1. UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
¥ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 0-50231
Federal National Mortgage Association
(Exact name of registrant as specified in its charter)
Fannie Mae
Federally chartered corporation
(State or other jurisdiction of
incorporation or organization)
52-0883107
(I.R.S. Employer
Identification No.)
3900 Wisconsin Avenue, NW
Washington, DC
(Address of principal executive offices)
20016
(Zip Code)
Registrant’s telephone number, including area code:
(202) 752-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¥ No n
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n
(Do not check if a smaller reporting company)
Smaller reporting company n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes n No ¥
As of September 30, 2008, there were 1,076,207,174 shares of common stock outstanding.
6. PART I—FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this Management’s Discussion and Analysis of Financial Condition and Results of
Operations, or MD&A, in conjunction with our unaudited condensed consolidated financial statements and
related notes, and the more detailed information contained in our Annual Report on Form 10-K for the year
ended December 31, 2007 (“2007 Form 10-K”). The results of operations presented in our unaudited
condensed consolidated financial statements and discussed in MD&A do not necessarily indicate the results
that may be expected for the full year.
The Director of the Federal Housing Finance Agency, or FHFA, our safety, soundness and mission
regulator, appointed FHFA as conservator of Fannie Mae on September 6, 2008. As conservator, FHFA
succeeded to all rights, titles, powers and privileges of the company, and of any stockholder, officer or
director of the company with respect to the company and our assets. Following the conservator’s taking
control of the company, a variety of factors that affect our business, results of operations, financial
condition, liquidity position, net worth, corporate structure, management, business strategies and objectives,
and controls and procedures changed materially prior to the end of the third quarter of 2008.
Please refer to “Description of our Business” below for a description of our business and to “Executive
Summary” and “Conservatorship and Treasury Agreements” below for more information on the
conservatorship and its impact on our business. Refer to “Glossary of Terms Used in this Report” in our 2007
10-K for an explanation of key terms used throughout this discussion.
INTRODUCTION
Fannie Mae is a government-sponsored enterprise, or GSE, that was chartered by Congress to support liquidity
and stability in the secondary mortgage market, where existing mortgage loans are purchased and sold. We do
not make mortgage loans to borrowers or conduct any other operations in the primary mortgage market, which
is where mortgage loans are originated.
We securitize mortgage loans originated by lenders in the primary mortgage market into mortgage-backed
securities that we refer to as Fannie Mae MBS. We describe the securitization process under “Description of
Our Business.” We also participate in the secondary mortgage market by purchasing mortgage loans (often
referred to as “whole loans”) and mortgage-related securities, including our own Fannie Mae MBS, for our
mortgage portfolio.
The Federal Housing Finance Regulatory Reform Act of 2008, referred to as the Regulatory Reform Act, was
signed into law by President Bush on July 30, 2008 and became effective immediately. The Regulatory
Reform Act established FHFA as an independent agency with general supervisory and regulatory authority
over Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. FHFA assumed the duties of our former
regulators, the Office of Federal Housing Enterprise Oversight, or OFHEO, and the Department of Housing
and Urban Development, or HUD, with respect to safety, soundness and mission oversight of Fannie Mae and
Freddie Mac. HUD remains our regulator with respect to fair lending matters. We reference OFHEO in this
report with respect to actions taken by our safety and soundness regulator prior to the creation of FHFA on
July 30, 2008.
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7. EXECUTIVE SUMMARY
Our “Executive Summary” presents a high-level overview of the most significant factors that our management
has focused on in currently evaluating our business and financial position and prospects, in addition to
highlighting changes in business operations and strategies, structure, and controls since we were placed into
conservatorship that we believe are significant.
Entry Into Conservatorship and Treasury Agreements
On September 7, 2008, Henry M. Paulson, Jr., Secretary of the U.S. Department of the Treasury, or Treasury,
and James B. Lockhart III, Director of FHFA announced several actions taken by Treasury and FHFA
regarding Fannie Mae. Mr. Lockhart stated that they took these actions “to help restore confidence in Fannie
Mae and Freddie Mac, enhance their capacity to fulfill their mission, and mitigate the systemic risk that has
contributed directly to the instability in the current market.” These actions included the following:
• placing us in conservatorship;
• the execution of a senior preferred stock purchase agreement by our conservator, on our behalf, and
Treasury, pursuant to which we issued to Treasury both senior preferred stock and a warrant to purchase
common stock; and
• the agreement to establish a temporary secured lending credit facility that is available to us.
Entry into Conservatorship
On September 6, 2008, at the request of the Secretary of the Treasury, the Chairman of the Board of
Governors of the Federal Reserve and the Director of FHFA, our Board of Directors adopted a resolution
consenting to putting the company into conservatorship. After obtaining this consent, the Director of FHFA
appointed FHFA as our conservator on September 6, 2008, in accordance with the Regulatory Reform Act and
the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
Upon its appointment, the conservator immediately succeeded to all rights, titles, powers and privileges of
Fannie Mae, and of any stockholder, officer or director of Fannie Mae with respect to Fannie Mae and its
assets, and succeeded to the title to all books, records and assets of Fannie Mae held by any other legal
custodian or third party. The conservator has the power to take over our assets and operate our business with
all the powers of our stockholders, directors and officers, and to conduct all business of the company. The
conservator announced at that time that it would eliminate the payment of dividends on common and preferred
stock during the conservatorship.
On September 7, 2008, the Director of FHFA issued a statement that he had determined that we could not
continue to operate safely and soundly and fulfill our critical public mission without significant action to
address FHFA’s concerns, which were principally: safety and soundness concerns as they existed at that time,
including our capitalization; market conditions; our financial performance and condition; our inability to
obtain funding according to normal practices and prices; and our critical importance in supporting the
U.S. residential mortgage market. We describe the terms of the conservatorship and the powers of our
conservator in detail below under “Conservatorship and Treasury Agreements—Conservatorship.”
Overview of Treasury Agreements
Senior Preferred Stock Purchase Agreement
The conservator, acting on our behalf, entered into a senior preferred stock purchase agreement with Treasury
on September 7, 2008. This agreement was amended and restated on September 26, 2008. We refer to this
agreement as the “senior preferred stock purchase agreement.” Under that agreement, Treasury provided us
with its commitment to provide up to $100 billion in funding under specified conditions. The agreement
requires Treasury, upon the request of the conservator, to provide funds to us after any quarter in which we
have a negative net worth (that is, our total liabilities exceed our total assets, as reflected on our GAAP
2
8. balance sheet). In addition, the agreement requires Treasury, upon the request of the conservator, to provide
funds to us if the conservator determines, at any time, that it will be mandated by law to appoint a receiver for
us unless we receive funds from Treasury under the commitment. In exchange for Treasury’s funding
commitment, we issued to Treasury, as an initial commitment fee, (1) one million shares of Variable
Liquidation Preference Senior Preferred Stock, Series 2008-2, which we refer to as the “senior preferred
stock,” and (2) a warrant to purchase, for a nominal price, shares of our common stock equal to 79.9% of the
total number of shares of our common stock outstanding on a fully diluted basis at the time the warrant is
exercised, which we refer to as the “warrant.” We did not receive any cash proceeds from Treasury as a result
of issuing the senior preferred stock or the warrant.
Under the terms of the senior preferred stock, Treasury is entitled to a quarterly dividend of 10% per year
(which increases to 12% per year if not paid timely and in cash) on the aggregate liquidation preference of the
senior preferred stock. To the extent we are required to draw on Treasury’s funding commitment, the
liquidation preference of the senior preferred stock will be increased by the amount of any funds we receive.
The amounts payable for the senior preferred stock dividend could be substantial and have an adverse impact
on our financial position and net worth. The senior preferred stock is senior in liquidation preference to our
common stock and all other series of preferred stock. In addition, beginning on March 31, 2010, we are
required to pay a quarterly commitment fee to Treasury, which fee will accrue from January 1, 2010. We are
required to pay this fee each quarter for as long as the senior preferred stock purchase agreement is in effect,
even if we do not request funds from Treasury under the agreement. The amount of this fee has not yet been
determined.
The senior preferred stock purchase agreement includes significant restrictions on our ability to manage our
business, including limiting the amount of indebtedness we can incur to 110% of our aggregate indebtedness
as of June 30, 2008 and capping the size of our mortgage portfolio at $850 billion as of December 31, 2009.
In addition, beginning in 2010, we must decrease the size of our mortgage portfolio at the rate of 10% per
year until it reaches $250 billion. Depending on the pace of future mortgage liquidations, we may need to
reduce or eliminate our purchases of mortgage assets or sell mortgage assets to achieve this reduction. In
addition, while the senior preferred stock is outstanding, we are prohibited from paying dividends (other than
on the senior preferred stock) or issuing equity securities without Treasury’s consent. The terms of the senior
preferred stock purchase agreement and warrant make it unlikely that we will be able to obtain equity from
private sources.
The senior preferred stock purchase agreement has an indefinite term and can terminate only in very limited
circumstances, which do not include the end of the conservatorship. The agreement therefore could continue
after the conservatorship ends. Treasury has the right to exercise the warrant, in whole or in part, at any time
on or before September 7, 2028. As of November 7, 2008, we have not drawn any funds from Treasury
pursuant to the senior preferred stock purchase agreement. We provide more detail about the provisions of the
senior preferred stock purchase agreement, the senior preferred stock and the warrant, the limited
circumstances under which those agreements terminate, and the limitations they place on our ability to manage
our business under “Conservatorship and Treasury Agreements—Treasury Agreements” below. See “Part II—
Item 1A—Risk Factors” for a discussion of how the restrictions under the senior preferred stock purchase
agreement may have a material adverse effect on our business.
Treasury Credit Facility
On September 19, 2008, we entered into a lending agreement with Treasury pursuant to which Treasury
established a new secured lending credit facility that is available to us until December 31, 2009 as a liquidity
back-stop. We refer to this as the “Treasury credit facility.” In order to borrow pursuant to the Treasury credit
facility, we are required to post collateral in the form of Fannie Mae MBS or Freddie Mac mortgage-backed
securities to secure all borrowings under the facility. The terms of any borrowings under the credit facility,
including the interest rate payable on the loan and the amount of collateral we will need to provide as security
for the loan, will be determined by Treasury. Treasury is not obligated under the credit facility to make any
loan to us.
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9. Treasury does not have authority to extend the term of this credit facility beyond December 31, 2009, which is
when Treasury’s temporary authority to purchase our obligations and other securities, granted by the
Regulatory Reform Act, expires. After December 31, 2009, Treasury may purchase up to $2.25 billion of our
obligations under its permanent authority, as set forth in the Charter Act.
As of November 7, 2008, we have not borrowed any amounts under the Treasury credit facility. The terms of
the Treasury credit facility are described in more detail in “Conservatorship and Treasury Agreements—
Treasury Agreements.”
Changes in Company Management and our Board of Directors
Since our entry into conservatorship on September 6, 2008, ten members of our Board of Directors have
resigned, including Stephen B. Ashley, our former Chairman of the Board. On September 16, 2008, the
conservator appointed Philip A. Laskawy as the new non-executive Chairman of our Board of Directors. We
currently have four members of our Board of Directors and nine vacancies.
As noted above, as our conservator, FHFA has assumed the powers of our Board of Directors. Accordingly,
the current Board of Directors acts with neither the power nor the duty to manage, direct or oversee our
business and affairs. The conservator has indicated that it intends to appoint a full Board of Directors to which
it will delegate specified roles and responsibilities.
On September 7, 2008, the conservator appointed Herbert M. Allison, Jr. as our President and Chief Executive
Officer, effective immediately.
Supervision of our Business under the Regulatory Reform Act and During Conservatorship
During the third quarter of 2008, we experienced a number of significant changes in our regulatory
supervisory environment. First, on July 30, 2008, President Bush signed into law the Regulatory Reform Act,
which placed us under the regulation of a new regulator, FHFA. That legislation strengthened the existing
safety and soundness oversight of the GSEs and provided FHFA with new safety and soundness authority that
is comparable to and in some respects broader than that of the federal bank agencies. That legislation gave
FHFA enhanced powers that, even if we had not been placed into conservatorship, gave FHFA the authority to
raise capital levels above statutory minimum levels, regulate the size and content of our portfolio, and approve
new mortgage products. That legislation also gave FHFA the authority to place the GSEs into conservatorship
or receivership under conditions set forth in the statute. Refer to “Legislation Relating to Our Regulatory
Framework” in our Form 10-Q for the period ended June 30, 2008 for additional detail regarding the
provisions of the Regulatory Reform Act and “Part II—Item 1A—Risk Factors” of this report for additional
risks and information regarding this regulation, including the receivership provisions.
Second, we experienced a change in control when we were placed into conservatorship on September 6, 2008.
Under conservatorship, we have additional heightened supervision and direction from our regulator, FHFA,
which is also acting as our conservator.
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10. The table below presents a summary comparison of various features of our business before and after we were
placed into conservatorship. Following this table, we provide additional information about a number of aspects
of our business now that we are in conservatorship under “Managing Our Business During Conservatorship.”
Topic Before Conservatorship During Conservatorship
Authority of Board of Directors,
management and stockholders
• Board of Directors with right to
determine the general policies
governing the operations of the
corporation and exercise all power
and authority of the company,
except as vested in stockholders or
as the Board chooses to delegate to
management
• Board of Directors delegated
significant authority to management
• Stockholders with specified voting
rights
• FHFA, as conservator, has all of the
power and authority of the Board of
Directors, management and the
shareholders
• The conservator has delegated
authority to management to conduct
day-to-day operations so that the
company can continue to operate in
the ordinary course of business. The
conservator retains overall
management authority, including the
authority to withdraw its delegations
to management at any time.
• Stockholders have no voting rights
Regulatory Supervision • Regulated by FHFA, our new
regulator created by the Regulatory
Reform Act
• Regulatory Reform Act gave
regulator significant additional
safety and soundness supervisory
powers
• Regulated by FHFA, with powers as
provided by Regulatory Reform Act
• Additional management authority by
FHFA, which is serving as our
conservator
Structure of Board of Directors • 13 directors: 12 independent plus
President and Chief Executive
Officer; independent, non-executive
Chairman of the Board
• Eight separate Board committees,
including Audit Committee in which
four of the five independent
members were “audit committee
financial experts”
• Currently four directors, consisting
of a non-executive Chairman of the
Board and three independent
directors (who were also directors of
Fannie Mae immediately prior to
conservatorship), with neither the
power nor the duty to manage, direct
or oversee our business and affairs
• No Board committees have members
or authority to act
• Conservator has indicated its intent
to appoint a full Board of Directors
to which it will delegate specified
roles and responsibilities
Management • Daniel H. Mudd served as President
and Chief Executive Officer from
June 2005 to September 6, 2008
• Herbert M. Allison, Jr. began
serving as President and Chief
Executive Officer on September 7,
2008
Capital • Statutory and regulatory capital
requirements
• Capital classifications as to
adequacy of capital issued by FHFA
on quarterly basis
• Capital requirements not binding
• Quarterly capital classifications by
FHFA suspended
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11. Topic Before Conservatorship During Conservatorship
Net Worth1
• Receivership mandatory if we have
negative net worth for 60 days
• Conservator has directed
management to focus on maintaining
positive stockholders’ equity1
in
order to avoid both the need to
request funds under the senior
preferred stock purchase agreement
and our mandatory receivership
• Receivership mandatory if we have
negative net worth for 60 days2
Managing for the Benefit of
Shareholders
• Maximize shareholder value over the
long term
• Fulfill our mission of providing
liquidity, stability and affordability
to the mortgage market
• No longer managed with a strategy
to maximize common shareholder
returns
• Maintain positive net worth and
fulfill our mission of providing
liquidity, stability and affordability
to the mortgage market
• Focus on returning to long-term
profitability if it does not adversely
affect our ability to maintain
positive net worth or fulfill our
mission
1
Our “net worth” refers to our assets less our liabilities, as reflected on our GAAP balance sheet. If we have a negative
net worth, then, if requested by the conservator (or by our Chief Financial Officer if we are not under
conservatorship), Treasury is required to provide funds to us pursuant to the senior preferred stock purchase agreement.
In addition, if we have a negative net worth for a period of 60 days, the Director of FHFA is required by the
Regulatory Reform Act to place us in receivership. “Net worth” is substantially the same as “stockholders equity;”
however, “net worth” also includes the minority interests that third parties own in our consolidated subsidiaries (which
was $159 million as of September 30, 2008), which is excluded from stockholders’ equity.
2
Treasury’s funding commitment under the senior preferred stock purchase agreement is expected to enable us to
maintain a positive net worth as long as Treasury has not yet invested the full $100 billion provided for in that
agreement.
The conservatorship has no specified termination date. There can be no assurance as to when or how the
conservatorship will be terminated, whether we will continue to exist following conservatorship, or what our
business structure will be during or following our conservatorship. In a statement issued on September 7,
2008, the Secretary of the Treasury indicated that 2008 and 2009 should be viewed as a “time out” where we
and Freddie Mac are stabilized while policymakers decide our future role and structure. He also stated that
there is a consensus that we and Freddie Mac pose a systemic risk and that we cannot continue in our current
form. For more information on the risks to our business relating to the conservatorship and uncertainties
regarding the future of our business, see “Part II—Item 1A—Risk Factors.”
Managing Our Business During Conservatorship
Our Management
FHFA, in its role as conservator, has overall management authority over our business. During the
conservatorship, the conservator has delegated authority to management to conduct day-to-day operations so
that the company can continue to operate in the ordinary course of business. We can, and have continued to,
enter into and enforce contracts with third parties. The conservator retains the authority to withdraw its
delegations to us at any time. The conservator is working actively with management to address and determine
the strategic direction for the enterprise, and in general has retained final decision-making authority in areas
regarding: significant impacts on operational, market, reputational or credit risk; major accounting
determinations, including policy changes; the creation of subsidiaries or affiliates and transacting with them;
significant litigation; setting executive compensation; retention of external auditors; significant mergers and
6
12. acquisitions; and any other matters the conservator believes are strategic or critical to the enterprise in order
for the conservator to fulfill its obligations during conservatorship. See “Conservatorship and Treasury
Agreements—Conservatorship—General Powers of the Conservator Under the Regulatory Reform Act” for
more information.
Our Objectives
Based on the Federal National Mortgage Association Charter Act, or Charter Act, public statements from
Treasury officials and guidance from our conservator, we have a variety of different, and potentially
conflicting, objectives, including:
• providing liquidity, stability and affordability in the mortgage market;
• immediately providing additional assistance to the struggling housing and mortgage markets;
• maintaining a positive net worth and avoiding the need to draw funds from Treasury pursuant to the
senior preferred stock purchase agreement;
• returning to long-term profitability; and
• protecting the interests of the taxpayers.
These objectives create conflicts in strategic and day-to-day decision making that will likely lead to less than
optimal outcomes for one or more, or possibly all, of these objectives. For example, maintaining a positive net
worth could require us to constrain some of our business activities, including activities that provide liquidity,
stability and affordability to the mortgage market. Conversely, to the extent we increase or undertake new
activities to assist the mortgage market, our financial results are likely to suffer, and we may be less able to
maintain a positive net worth. We regularly consult with and receive direction from our conservator on how to
balance these objectives. To the extent that we are unable to maintain a positive net worth, we will be required
to obtain funding from Treasury under the senior preferred stock purchase agreement, which will increase our
ongoing expenses and, therefore, extend the period of time until we might be able to return to profitability.
These objectives also create risks that we discuss in “Part II—Item 1A—Risk Factors.”
Changes in Strategies to Meet New Objectives
Since September 6, 2008, we have made a number of changes in the strategies we use to manage our business
in support of our new objectives outlined above. These include the changes we describe below.
Eliminating Planned Increase in Adverse Market Delivery Charge
As part of our efforts to increase liquidity in the mortgage market and make mortgage loans more affordable,
we announced on October 2, 2008 that we were eliminating our previously announced 25 basis point increase
in our adverse market delivery charge that was scheduled to take effect on November 1, 2008. The elimination
of this charge will reduce our net income. We intend for our lenders to pass this savings on to borrowers in
the form of lower mortgage costs. Whether this action will actually result in lower mortgage costs for
borrowers, however, will depend on a variety of issues beyond our control, including whether or not lenders
pass these savings on to borrowers, the overall level of credit that lenders are willing to extend to borrowers,
the assessed riskiness of a particular borrower in the current market environment and other factors.
Increasing the Size of Our Mortgage Portfolio
Consistent with our ability under the senior preferred stock purchase agreement to increase the size of our
mortgage portfolio through the end of 2009, FHFA has directed us to acquire and hold increased amounts of
mortgage loans and mortgage-related securities in our mortgage portfolio to provide additional liquidity to the
mortgage market. Our calculation of the mortgage portfolio, which has not been confirmed by Treasury, is our
gross mortgage portfolio (defined as the unpaid principal balance of our mortgage loans and mortgage-related
securities, excluding the effect of market valuation, premiums, discounts and impact of consolidations). As of
September 30, 2008, our gross mortgage portfolio was $761.4 million. Our extremely limited ability to issue
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13. callable or long-term debt at this time (which is discussed in greater detail below) makes it difficult to
increase the size of our mortgage portfolio. In addition, the covenant in the senior preferred stock purchase
agreement prohibiting us from issuing debt in excess of 110% of our aggregate indebtedness as of June 30,
2008 likely will prohibit us from increasing the size of our mortgage portfolio to $850 billion, unless Treasury
elects to amend or waive this limitation. Our calculation of our aggregate indebtedness as of June 30, 2008,
which has not been confirmed by Treasury, set this debt limit at $892 billion. We calculate aggregate
indebtedness as the unpaid principal balance of our debt outstanding, or in the case of long-term zero coupon
bonds, at maturity and exclude basis adjustments and debt from consolidations. As of October 31, 2008, we
estimate that our aggregate indebtedness totaled $880 billion. For a discussion of the limitations we are
currently experiencing on our ability to issue debt securities, see “Liquidity,” “Liquidity and Capital
Management—Liquidity” and “Part II—Item 1A—Risk Factors.”
Housing and Economic Conditions
The housing, mortgage and credit markets, as well as the general economy, have experienced significant
challenges, which have driven our financial results. The housing market downturn that began in the third
quarter of 2006, and continued through 2007, has significantly worsened in 2008. The market continues to
experience declines in home sales, housing starts, mortgage originations and home prices, as well as increases
in mortgage loan delinquencies, defaults and foreclosures. Growth in U.S. residential mortgage debt
outstanding slowed to an estimated annual rate of 2.0% based on the first six months of 2008, compared with
an estimated annual rate of 8.3% based on the first six months of 2007, and is expected to continue to decline
to a growth rate of about 0% in 2009. We continue to expect that home prices will decline 7% to 9% on a
national basis in 2008, and that home prices nationally will decline 15% to 19% from their peak in 2006
before they stabilize. Through September 30, 2008, home prices nationally have declined 10% from their peak
in 2006. (Our estimates compare to approximately 12% to 16% for 2008, and 27% to 32% peak-to-trough,
using the Case-Schiller index.) We currently expect home price declines at the top end of our estimated
ranges. We also expect significant regional variation in these national home price decline percentages, with
steeper declines in certain areas such as Florida, California, Nevada and Arizona. The deteriorating economic
conditions and related government actions that occurred in the third quarter of 2008 have increased the
uncertainty of future economic conditions, including home price movements. Therefore, while our peak-to-
trough home price forecast is at the top end of the 15% to 19% range, there is increasing uncertainty about the
actual amount of decline that will occur.
The continuing downturn in the housing and mortgage markets has been affected by, and has had an effect on,
challenging conditions that existed across the global financial markets. This adverse market environment
intensified towards the end of the quarter, particularly in September, and into October, and was characterized
by increased illiquidity in the credit markets, wider credit spreads, lower business and consumer confidence,
and concerns about corporate earnings and the solvency of many financial institutions. Conditions in the
financial services industry were particularly difficult. In September 2008, we and Freddie Mac were placed
into conservatorship, Lehman Brothers Holdings Inc. (referred to as Lehman Brothers) filed for bankruptcy,
and a number of major U.S. financial institutions consolidated or received financial assistance from the
U.S. government.
Real gross domestic product, or GDP, growth was Ϫ0.3% in the third quarter of 2008. The unemployment rate
at the end of the third quarter of 2008 increased to 6.1% from 5.0% at the end of 2007, the highest level since
2003. In the equity markets, the Dow Jones Industrial Average, the S&P 500 Index and the NASDAQ
Composite Index decreased on average by 9%, 9% and 6%, respectively, during the third quarter of 2008. In
October 2008, the Dow Jones Industrial Average, the S&P 500 and the NASDAQ Composite Index decreased
on average by 14%, 17% and 18%, respectively.
In September 2008, Treasury proposed a plan to buy mortgage-related, illiquid and other troubled assets from
U.S. financial institutions. Also in September 2008, the Federal Reserve announced enhancements to its
programs to provide additional liquidity to the asset-backed commercial paper and money markets, including
plans to purchase from primary dealers short-term debt obligations issued by us, Freddie Mac and the Federal
Home Loan Banks. As an additional response to the still worsening credit conditions, the U.S. government and
8
14. other world governments took a number of actions. In early October 2008, the Emergency Economic
Stabilization Act of 2008 was enacted, and the Federal Reserve announced that it would establish a
commercial paper funding facility in order to provide additional liquidity to the short-term debt markets. Also,
in October 2008, the Federal Reserve and other central banks lowered interest rates in a coordinated action.
On October 14, 2008, the U.S. government announced a series of initiatives to strengthen market stability,
improve the strength of financial institutions, and enhance market liquidity. Treasury announced a capital
purchase program in which eligible financial institutions would sell preferred shares to the U.S. government.
Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms.
As of November 1, 2008, Treasury had invested $125 billion in nine large financial institutions under this
program. In addition, the Federal Deposit Insurance Corporation, or FDIC, announced a temporary liquidity
guarantee program pursuant to which it will guarantee, until June 30, 2012, the senior debt issued on or before
June 30, 2009 by all FDIC-insured institutions and their holding companies, as well as deposits in non-
interest-bearing accounts held in FDIC-insured institutions. Also, the Federal Reserve announced that its
commercial paper funding facility program will fund purchases of commercial paper of three-month maturity
from high-quality issuers in an effort to provide additional liquidity to the short-term debt markets.
Summary of Our Financial Results for the Third Quarter of 2008
The challenges experienced in the housing, mortgage and financial markets throughout 2008 continued to
increase significantly during the third quarter of 2008. We experienced a change in control when we were
placed into conservatorship on September 6, 2008.
Both prior to and after initiation of the conservatorship in the third quarter of 2008, our results continued to be
adversely affected by conditions in the housing market. In addition, we recorded a significant non-cash charge
of $21.4 billion during the third quarter of 2008 to establish a deferred tax asset valuation allowance, which
contributed to a net loss of $29.0 billion and a diluted loss per share of $13.00 for the third quarter of 2008,
compared with a net loss of $2.3 billion and a diluted loss per share of $2.54 for the second quarter of 2008.
We recorded a net loss of $1.4 billion and diluted loss per share of $1.56 for the third quarter of 2007. The
$26.7 billion increase in our net loss for the third quarter of 2008 compared with the second quarter of 2008
was driven principally by our establishment of a deferred tax asset valuation allowance, as well as an increase
in fair value losses, credit-related expenses, and investment losses from other-than-temporary impairment. We
have recorded a net loss in each of the first three quarters of 2008, for a total net loss of $33.5 billion and a
diluted loss per share of $24.24 for the nine months ended September 30, 2008, compared with net income of
$1.5 billion and diluted earnings per share of $1.17 for the nine months ended September 30, 2007.
We determined it was necessary to establish a valuation allowance against our deferred tax assets due to the
rapid deterioration of market conditions discussed above, the uncertainty of future market conditions on our
results of operations and the uncertainty surrounding our future business model as a result of our placement
into conservatorship by FHFA on September 6, 2008. This charge reduced our net deferred tax assets to
$4.6 billion as of September 30, 2008, from $20.6 billion as of June 30, 2008.
Our mortgage credit book of business increased to $3.1 trillion as of September 30, 2008 from $2.9 trillion as
of December 31, 2007, as we have continued to perform our chartered mission of helping provide liquidity to
the mortgage markets. Our estimated market share of new single-family mortgage-related securities issuances
was an estimated 42.2% for the third quarter of 2008, compared with an estimated 45.4% for the second
quarter of 2008 and 50.1% for the first quarter of 2008. Our estimated market share of new single-family
mortgage-related securities issuances decreased from levels during the first and second quarters of 2008
primarily due to changes in our pricing and eligibility standards, which reduced our acquisition of higher risk
loans, as well as changes in the eligibility standards of the mortgage insurance companies, which further
reduced our acquisition of loans with high loan-to-value ratios. The cumulative effect of these changes
reduced our acquisitions in the period.
We provide more detailed discussions of key factors affecting changes in our results of operations and
financial condition in “Consolidated Results of Operations,” “Business Segment Results,” “Consolidated
Balance Sheet Analysis,” “Supplemental Non-GAAP Information—Fair Value Balance Sheets,” and “Risk
9
15. Management—Credit Risk Management—Mortgage Credit Risk Management—Mortgage Credit Book of
Business.”
Net Worth
As a result of our net loss for the nine months ended September 30, 2008, our net worth (defined as the
amount by which our total assets exceeded our total liabilities, as reflected on our GAAP balance sheet) has
decreased to $9.4 billion as of September 30, 2008 from $44.1 billion as of December 31, 2007. Moreover,
$4.6 billion of our net worth as of September 30, 2008 consisted of our remaining deferred tax assets, which
could be subject to an additional valuation allowance in the future. In addition, the widening of spreads that
occurred in October 2008 resulted in mark-to-market losses on our investment securities that have decreased
our net worth since September 30, 2008.
Under the Regulatory Reform Act, FHFA must place us into receivership if our assets are less than our
obligations for a period of 60 days. If current trends in the housing and financial markets continue or worsen,
and we have a significant net loss in the fourth quarter of 2008, we may have a negative net worth as of
December 31, 2008. If this were to occur, we would be required to obtain funding from Treasury pursuant to
its commitment under the senior preferred stock purchase agreement in order to avoid a mandatory trigger of
receivership under the Regulatory Reform Act.
Liquidity
We fund our purchases of mortgage loans primarily from the proceeds from sales of our debt securities. In
September 2008, Treasury made available to us two additional sources of funding: the Treasury credit facility
and the senior preferred stock purchase agreement, as described below under “Conservatorship and Treasury
Agreements—Treasury Agreements.”
Since early July 2008, we have experienced significant deterioration in our access to the unsecured debt
markets, particularly for long-term debt, and in the yields on our debt as compared to relevant market
benchmarks. Although we experienced a slight stabilization in our access to the short-term debt markets
immediately following our entry into conservatorship in early September, we experienced renewed
deterioration in our access to the short-term debt markets following the initial improvement. Beginning in
October, consistent demand for our debt securities has decreased even further, particularly for our long-term
debt and callable debt, and the interest rates we must pay on our new issuances of short-term debt securities
have increased. Although we experienced a reduction in LIBOR rates in late October and early November, and
as a result we have begun to see some improvement in our short-term debt yields, the recent improvement
may not continue or may reverse. We have experienced reduced demand for our debt obligations from some of
our historical sources of that demand, particularly in international markets.
There are several factors contributing to the reduced demand for our debt securities, including continued
severe market disruptions, market concerns about our capital position and the future of our business (including
its future profitability, future structure, regulatory actions and agency status) and the extent of
U.S. government support for our business. In addition, on October 14, 2008, the Secretary of the Treasury, the
Chairman of the Federal Reserve Board and the Chairman of the FDIC announced that the FDIC will
guarantee until June 30, 2012 new senior unsecured debt issued on or before June 30, 2009 by all FDIC-
insured institutions and their holding companies. The U.S. government does not guarantee, directly or
indirectly, our securities or other obligations. It should be noted that, as described above, pursuant to the
Housing and Economic Recovery Act of 2008, Congress authorized Treasury to purchase our debt, equity and
other securities, which authority Treasury used to make its commitment under the senior preferred stock
purchase agreement to provide up to $100 billion in funds as needed to help us maintain a positive net worth
(which means that our total assets exceed our total liabilities, as reflected on our GAAP balance sheet) and
made available to us the Treasury credit facility. In addition, the U.S. government guarantee of competing
obligations means that those obligations receive a more favorable risk weighting than our securities under
bank and thrift risk-based capital rules, and therefore may make them more attractive investments than our
debt securities. Moreover, to the extent the market for our debt securities has improved due to the availability
10
16. of the Treasury credit facility, our “roll over” risk may increase in anticipation of the expiration of the credit
facility on December 31, 2009.
As noted above, we currently have limited ability to issue debt securities with maturities greater than one year.
Although we typically sell one or more fixed-rate issues of our Benchmark» Notes with a minimum issue size
of $3.0 billion each month, we announced on October 20, 2008 that we would not issue Benchmark» Notes in
October. We have, therefore, relied increasingly on short-term debt to fund our purchases of mortgage loans,
which are by nature long-term assets. As a result, we are required to refinance, or “roll over,” our debt on a
more frequent basis, exposing us to an increased risk of insufficient demand, increasing interest rates and
adverse credit market conditions. See “Liquidity and Capital Management—Liquidity—Funding—Debt
Funding Activity” for more information on our debt funding activities and risks posed by our current market
challenges and “Part II—Item 1A—Risk Factors” for a discussion of the risks to our business posed by our
reliance on the issuance of debt to fund our operations. In addition, our increasing reliance on short-term debt
and limited ability to issue callable debt, combined with limitations on the availability of a sufficient volume
of reasonably priced derivative instruments to hedge our short-term debt position, has had an adverse impact
on our duration and interest rate risk management activities. See “Risk Management—Interest Rate Risk
Management and Other Market Risks” for more information regarding our interest rate risk management
activities.
The Treasury credit facility and the senior preferred stock purchase agreement may provide additional sources
of funding in the event that we cannot adequately access the unsecured debt markets. Our access to the
Treasury credit facility is subject to Treasury’s agreement to make funds available pursuant to that facility, and
amounts available to us under the facility are limited by the amount of collateral we are able to supply to
secure the loan. As of September 30, 2008, we had approximately $190 billion in unpaid principal balance of
Fannie Mae MBS and Freddie Mac mortgage-backed securities available as collateral to secure loans under
the Treasury credit facility. We believe the fair market value of these Fannie Mae MBS and Freddie Mac
mortgage-backed securities is less than the current unpaid principal balance of these securities. The Federal
Reserve Bank of New York (referred to as FRBNY), as collateral valuation agent for Treasury, has discretion
to value these securities as it considers appropriate, and we believe would apply a “haircut” reducing the value
it assigns to these securities from their current unpaid principal balance in order to reflect its determination of
the current fair market value of the collateral. Accordingly, the amount that we could borrow under the credit
facility using those securities as collateral would be less than $190 billion. We also hold whole loans in our
mortgage portfolio, and a portion of these whole loans could potentially be securitized into Fannie Mae MBS
and then pledged as collateral under the credit facility; however, as described in “Liquidity and Capital
Management—Liquidity—Liquidity Risk Management—Liquidity Contingency Plan,” we currently face
technological and operational limitations on our ability to securitize these loans. There can be no assurance as
to the value that FRBNY would assign to the collateral we provide under the credit facility, or that our
collateral would continue to maintain that value at the time of any actual use of the credit facility. If we were
to pledge the collateral under the Treasury credit facility, we would be restricted in our ability to pledge
collateral for other secured lending transactions. Further, unless amended or waived by Treasury, the amount
we may borrow under the credit facility is limited by the restriction under the senior preferred stock purchase
agreement on incurring debt in excess of 110% of our aggregate indebtedness as of June 30, 2008.
An additional source of funds is the senior preferred stock purchase agreement, but Treasury has committed to
provide funds to us under the agreement only to the extent that we have a negative net worth (specifically, if
our total liabilities exceed our total assets, as reflected on our GAAP balance sheet). As a result of these terms
and structures of the arrangements with Treasury, the amounts that we may draw under the Treasury credit
facility and the senior preferred stock purchase agreement together may prove insufficient to allow us either to
roll over our existing debt at the time we need to do so or to continue to fulfill our mission of providing
liquidity to the mortgage market at appropriate levels. See “Liquidity and Capital Management—Liquidity”
and “Part II—Item 1A—Risk Factors” for additional information regarding our liquidity position and the risks
to our business relating to our liquidity position.
To the extent that we are unable to access the debt markets, we may be able to rely on alternative sources of
liquidity in the marketplace as outlined in our liquidity contingency plan. In the current market environment,
11
17. however, we have significant uncertainty regarding our ability to execute on our liquidity contingency plan.
See “Liquidity and Capital Management—Liquidity—Liquidity Risk Management—Liquidity Contingency
Plan” for a description of our liquidity contingency plan and the current uncertainties regarding that plan.
Managing Problem Mortgage Loans and Preventing Foreclosures
We expect economic conditions and falling home prices to continue to negatively affect our credit
performance in 2008 and 2009, which will cause our credit losses to increase. Further, if economic conditions
continue to decline and the unemployment rate continues to rise, more borrowers will be unable to make their
monthly mortgage payments, which would lead to higher defaults, foreclosures, sharper declines in home
prices and higher credit losses.
Approximately 92% of our guaranty book of business is made up of single-family conventional mortgage
loans that we own or that back Fannie Mae MBS. Therefore, most of our credit loss reduction and foreclosure
prevention efforts are focused on our single-family conventional loans, both those we hold in our mortgage
portfolio and those we guarantee.
As of September 30, 2008, our total nonperforming loans were $63.6 billion, or 2.2% of our total guaranty
book of business, compared with $46.1 billion, or 1.6%, as of June 30, 2008, and $35.8 billion, or 1.3%, as of
December 31, 2007. Our total nonperforming assets, which consist of nonperforming loans together with our
inventory of foreclosed properties, were $71.0 billion, or 2.4% of our total guaranty book of business and
foreclosed properties, compared with nonperforming assets of $52.0 billion, or 1.8%, as of June 30, 2008, and
$39.3 billion, or 1.4%, as of December 31, 2007. While it is expected that our nonperforming assets will
increase in 2008 and 2009, our credit management actions are designed to prevent the number of our
nonperforming assets from being higher than they otherwise would be and to reduce the number of our
nonperforming assets over time.
Other key measures of how well we manage our credit losses are our single-family foreclosure rate and our
inventory of single-family foreclosed properties. Our single-family foreclosure rate was 0.16% in the third
quarter of 2008, compared with 0.13% in the second quarter of 2008, and 0.07% in the third quarter of 2007.
Our inventory of single-family foreclosed properties was 67,519 as of September 30, 2008, compared with
54,173 as of June 30, 2008 and 33,729 as of December 31, 2007.
In light of the continued deterioration in our credit performance, we have been, and are continuing, to take
steps designed to control, and ultimately reduce, the number of our foreclosures and our credit losses. During
the third quarter of 2008, we initiated or enhanced a number of the tools that we use to manage our credit
losses.
• Workouts of Delinquent Loans. We increased our foreclosure prevention workouts from an average of
approximately 7,000 per month during the period from January through May 2008, to an average of
approximately 14,000 per month during the period from June to September 2008. We are using a variety
of tools to address the need for more workouts as the number of our delinquent loans rises. During the
period from January 2007 through September 2008, we helped nearly 300,000 homeowners avoid
foreclosure through workouts and refinancing. We helped approximately 131,000 of these homeowners
avoid foreclosure through workouts by, among other means, creating repayment plans, providing
HomeSaver Advance bridge loans, reducing interest rates, extending loan terms or other workouts to assist
struggling borrowers. Information about our refinancing assistance is discussed below under “Supporting
Borrowers and Mortgage Market Liquidity.”
— HomeSaver AdvanceTM
. One of the workout tools we implemented in 2008 is HomeSaver Advance,
an unsecured, personal loan designed to help a borrower after a temporary financial difficulty to bring
a delinquent mortgage loan current. We began purchasing HomeSaver Advance loans in the first
quarter of 2008 and have since purchased more than 45,000 of these loans.
— Outreach to Delinquent Borrowers. We have expanded our use of techniques to contact borrowers
who have missed payments, even as early as after one missed payment. These techniques include
12
18. targeted mass mailings to borrowers with loans considered high risk and the use of specialty servicers
with experience in contacting and working with high-risk borrowers.
— Review of Foreclosure Referrals. We recently began an initiative in which we review loans headed on
a path to foreclosure in an effort to keep borrowers in their homes and to help us avoid the increased
credit losses associated with foreclosures. Our objective is to provide this review, which we call a
“Second Look,” to every owner-occupied property prior to foreclosure.
• Servicer Management. We have made changes to how we oversee mortgage servicers to streamline the
workout process and provide additional incentives for workout performance. We delegate many loss
mitigation decisions to our servicers so that they are able to react more quickly to the needs of delinquent
borrowers, and we have implemented a number of operational changes requested by servicers to help
them work more effectively with borrowers. We have increased the incentive fees we pay to servicers to
conduct workouts, and expanded the deployment of our personnel and contractors inside the offices of our
largest mortgage servicers to make sure our workout guidelines are followed. We continue working with
our servicers to find ways to enhance our workout protocols and our servicers’ work flow processes.
• Review of Defaulted Loans. In 2008, we continued performing loan reviews in cases where we believe
we have incurred a loss or could incur a loss due to fraud or improper lending practices and we have
increased our efforts to pursue recoveries from mortgage lenders related to these loans, including
demanding that lenders repurchase the loans from us pursuant to their contractual obligations.
• REO Inventory Management. As our foreclosure rates have increased and home sales have declined, our
inventory of foreclosed properties we own has increased. We refer to these properties as real estate
owned, or REO, properties. We have expanded both our internal REO inventory management capabilities
and the network of firms that assist us with property dispositions.
• Underwriting Changes. We have continued to review and revise our underwriting and eligibility
standards, including changes implemented through our most recent release of DesktopUnderwriter», our
proprietary underwriting system, to reduce our exposure to the current risks in the housing market. The
revisions we have implemented have resulted in a significant reduction in our acquisition of loan types
that currently represent a majority of our credit losses, especially Alt-A loans. Additional revisions
become effective in December 2008 and January 2009. Effective January 1, 2009, we are discontinuing
the purchase of newly originated Alt-A loans; we are currently purchasing only a very small number of
these loans in order to allow our lenders to deliver loans already in the pipeline when we announced our
decision to terminate Alt-A purchases. We may continue to purchase Alt-A loans that are not newly
originated and that meet acceptable eligibility and underwriting guidelines. We and the conservator
continue to review our underwriting and eligibility standards and may in the future make additional
changes as necessary to reflect future changes in the market and to fulfill our mission to expand the
availability and affordability of mortgage credit.
For a further description of our management of mortgage credit risk, refer to “Consolidated Results of
Operations—Credit-Related Expenses” and “Risk Management—Credit Risk Management—Mortgage Credit
Risk Management.” Actions that we are taking to manage problem loans and prevent foreclosures may
increase our expenses and may not be effective in reducing our credit losses, as described in “Part II—
Item 1A—Risk Factors.”
Supporting Borrowers and Mortgage Market Liquidity
We are continually working to fulfill our mission of providing liquidity, stability and affordability to the
housing and mortgage markets. Recent economic conditions and the mortgage market downturn have made it
more important than ever that we fulfill our mission by supporting borrowers struggling to pay their
mortgages, helping new borrowers obtain mortgage loans, and providing liquidity, stability and affordability to
the housing and mortgage markets for the long term.
13
19. Supporting Borrowers
To support struggling borrowers and help new borrowers obtain mortgage loans, in addition to the measures
discussed above, we use a variety of additional strategies, which include:
• Refinancing Assistance. Since 2007, we have been focusing on helping homeowners refinance into loans
designed to help them keep their homes in the long term, such as loans with fixed rates and loans with
lower monthly payments due to lower interest rates and/or longer terms. Part of this effort includes
helping borrowers with subprime loans refinance with fixed-rate prime mortgages. Since January 2007, we
have refinanced nearly 169,000 subprime loans.
• Support for Borrower Counseling Efforts. We contribute to programs, such as the Hope Hotline, that offer
counseling to borrowers to help them develop a plan that will enable them to remain in their homes. During
the period from January 2007 through September 2008, we committed nearly $12 million in grants to support
borrower counseling efforts, including mailings, telethons, foreclosure prevention workshops and housing fairs.
• Cancellation of Planned Delivery Fee Increase. As discussed above, in October 2008, we canceled a
planned 25 basis point increase in our adverse market delivery charge on mortgage loans.
• Increased financing of jumbo-conforming loans. We increased our financing of jumbo-conforming loans
by nearly 40%, from $2.3 billion to $3.2 billion, between August and September 2008. These are loans
for homes in high-cost metropolitan areas, and they have higher principal balances than we would be
permitted to purchase or guarantee if the homes were not in those areas.
We are working with the conservator to develop and deliver further solutions to help borrowers avoid foreclosure.
Providing Mortgage Market Liquidity
In addition to our borrower support efforts, our work to support lenders and provide mortgage market liquidity
includes the following.
• Ongoing provision of liquidity to the mortgage markets. In September, we purchased or guaranteed an
estimated $44.1 billion in new business, measured by unpaid principal balance, consisting primarily of
single-family mortgages, compared with $40.5 billion in August. We helped to finance 200,000 single-
family homes in September. During the first nine months of 2008, we purchased approximately
$28.6 billion of new and existing multifamily loans, helping to finance 480,000 units of rental housing.
• Partnership with Federal Home Loan Bank of Chicago. On October 7, 2008, we announced that we had
entered into an agreement with the Federal Home Loan Bank of Chicago under which we have committed
to purchase 15-year and 30-year fixed-rate mortgage loans that the bank has acquired from its member
institutions through its Mortgage Partnership Finance» (MPF») program, which helps make affordable
mortgages available to working families across the country. This arrangement is designed to allow us to
expand our service to a broader market and provide additional liquidity to the mortgage market while
prudently managing risk.
• Reduced fees for our real estate mortgage investment conduits, or REMICs. In September 2008, we
reduced the fees for our real estate mortgage investment conduits, or REMICs, by 15%.
• Multifamily rate lock commitment. In the last six months, we introduced a streamlined rate lock
commitment for multifamily lenders that allows them to lock in the rate that they will charge a borrower
for a loan at any point during the underwriting process.
• Relaxing restrictions on institutions holding principal and interest payments on our behalf in response to
FDIC rule change. In October 2008, the FDIC announced a rule change that lowered our risk of
suffering losses if a party holding principal and interest payments on our behalf in custodial depository
accounts failed. In response to this rule change, we have reviewed and curtailed or reversed certain
actions we had taken in recent months to reduce our risk, including reducing the amount of our funds
permitted to be held with mortgage servicers, requiring more frequent remittances of funds and moving
funds held with our largest counterparties from custodial accounts to trust accounts.
14
20. Outlook
The expansion of the mortgage turmoil into the credit crisis that began in 2007 has continued and worsened
through October 2008 and, combined with the commencement of the conservatorship and entry into the
Treasury agreements in September 2008, have materially impacted our outlook for the remainder of 2008 and
2009. We expect that the current crisis in the U.S. and global financial markets will continue to adversely
affect our financial results through the remainder of 2008 and 2009. Given our increasing uncertainty about
the future, we are no longer able to have expectations with respect to certain matters.
Overall Market Conditions: We expect that the current crisis in the U.S. and global financial markets will
continue. We expect the unemployment rate to continue to increase as the economic slowdown continues. We
expect to continue to experience home price declines and rising default and severity rates, all of which may
worsen as unemployment rates continue to increase and if the U.S. experiences a broad-based recession. We
expect growth in mortgage debt outstanding to continue to decline to a growth rate of about 0% in 2009. We
continue to expect the level of foreclosures and single-family delinquency rates to continue to increase further
through the end of 2008, and still further in 2009.
Home Price Declines: We continue to expect that home prices will decline 7% to 9% on a national basis in
2008, and that we will experience a peak-to-trough home price decline of 15% to 19%. Through
September 30, 2008, home prices nationally have declined 10% from their peak in 2006. (Our estimates
compare to approximately 12% to 16% for 2008, and 27% to 32% peak-to-trough, using the Case-Schiller
index.) We currently expect home price declines at the top end of our estimated ranges. We also expect
significant regional variation in these national home price decline percentages, with steeper declines in certain
areas such as Florida, California, Nevada and Arizona. The deteriorating economic conditions and related
government actions that occurred in the third quarter have increased the uncertainty of future economic
conditions, including home price movements. Therefore, while our peak-to-trough home price forecast is at the
top end of the 15% to 19% range, there is increasing uncertainty about the actual amount of decline that will
occur.
Credit Losses and Loss Reserves: We continue to expect our credit loss ratio (which excludes SOP 03-3 and
HomeSaver Advance fair value losses) to be between 23 and 26 basis points in 2008, partially due to a shift in
credit losses from 2008 into 2009 as a result of certain foreclosure delays occurring in particular regions of the
country and deployment of loss mitigation strategies that have the effect of lengthening the foreclosure
pipeline. We continue to expect our credit loss ratio will increase further in 2009 compared with 2008. We
expect significant continued increase in our combined loss reserves through the remainder of 2008 and further
increases to continue in 2009.
Liquidity: In the absence of action by Treasury to increase the level of support Treasury provides for our debt, we
expect continued significant pressure on our access to the short-term debt markets and extremely limited access to
the long-term debt markets at economically reasonable rates, both of which will significantly increase our
borrowing costs, increase our “roll over” risk, limit our ability to grow, limit our ability to effectively manage our
market and liquidity risk and increase the likelihood that we may need to borrow under the Treasury credit facility.
Uncertainty Regarding our Future Status and Profitability: We expect that we will continue to face pressure,
and are likely to experience adverse economic effects, from the strategic and day-to-day conflicts among our
competing objectives. We are also likely to experience adverse economic effects from activities we may
undertake to support the mortgage market and help borrowers. We expect that we will continue to face
substantial uncertainty as to our future business strategy, business purpose and fundamental business structure.
Because of the current state of the market and the fact that we are in conservatorship, we no longer are able to
provide guidance with respect to the growth of our guaranty book of business, growth in our guaranty fee
income, the net interest yield we expect to achieve, or the portion of our credit-related expenses we expect to
recognize by the end of 2008.
15
21. SELECTED FINANCIAL DATA
The selected financial data presented below is summarized from our condensed consolidated results of
operations for the three and nine months ended September 30, 2008 and 2007, as well as from our condensed
consolidated balance sheets as of September 30, 2008 and December 31, 2007. This data should be read in
conjunction with this MD&A, as well as with the unaudited condensed consolidated financial statements and
related notes included in this report and with our audited consolidated financial statements and related notes
included in our 2007 Form 10-K.
2008 2007(1)
2008 2007(1)
For the
Three Months Ended
September 30,
For the
Nine Months Ended
September 30,
(In millions, except per share amounts)
Statement of operations data:
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,355 $ 1,058 $ 6,102 $ 3,445
Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,475 1,232 4,835 3,450
Losses on certain guaranty contracts . . . . . . . . . . . . . . . . . . . . . . . . . . — (294) — (1,038)
Trust management income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 146 247 460
Fair value losses, net(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,947) (2,082) (7,807) (1,224)
Other income (expenses), net(3)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,024) (58) (3,083) 339
Credit-related expenses(4)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,241) (1,200) (17,833) (2,039)
(Provision) benefit for federal income taxes . . . . . . . . . . . . . . . . . . . . . (17,011) 582 (13,607) 468
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,994) (1,399) (33,480) 1,509
Preferred stock dividends and issuance costs at redemption(5)
. . . . . . . . . (419) (119) (1,044) (372)
Net income (loss) available to common stockholders(5)
. . . . . . . . . . . . . (29,413) (1,518) (34,524) 1,137
Per common share data:
Earnings (loss) per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (13.00) $ (1.56) $ (24.24) $ 1.17
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13.00) (1.56) (24.24) 1.17
Weighted-average common shares outstanding:
Basic(6)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,262 974 1,424 973
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,262 974 1,424 975
Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . $ 0.05 $ 0.50 $ 0.75 $ 1.40
New business acquisition data:
Fannie Mae MBS issues acquired by third parties(7)
. . . . . . . . . . . . . . . $ 80,547 $148,320 $373,980 $407,962
Mortgage portfolio purchases(8)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,400 49,574 144,070 134,407
New business acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,947 $197,894 $518,050 $542,369
16
23. (5)
Amounts for the three and nine months ended September 30, 2008 include approximately $6 million of dividends
accumulated, but undeclared, for the reporting period on our outstanding cumulative senior preferred stock.
(6)
Amounts for the three and nine months ended September 30, 2008 include the weighted-average shares of common
stock that would be issuable upon the full exercise of the warrant issued to Treasury from the date of conservatorship
through the end of the reporting period. Because the warrant’s exercise price of $0.00001 per share is considered non-
substantive (compared to the market price of our common stock), the warrant was evaluated based on its substance
over form. It was determined to have characteristics of non-voting common stock, and thus included in the
computation of basic earnings (loss) per share.
(7)
Unpaid principal balance of Fannie Mae MBS issued and guaranteed by us during the reporting period less:
(a) securitizations of mortgage loans held in our portfolio during the reporting period and (b) Fannie Mae MBS
purchased for our investment portfolio during the reporting period.
(8)
Unpaid principal balance of mortgage loans and mortgage-related securities we purchased for our investment
portfolio during the reporting period. Includes acquisition of mortgage-related securities accounted for as the
extinguishment of debt because the entity underlying the mortgage-related securities has been consolidated in our
condensed consolidated balance sheet and includes capitalized interest.
(9)
Total assets less total liabilities.
(10)
Unpaid principal balance of mortgage loans and mortgage-related securities (including Fannie Mae MBS) held in our
portfolio.
(11)
Unpaid principal balance of Fannie Mae MBS held by third-party investors. The principal balance of resecuritized
Fannie Mae MBS is included only once in the reported amount.
(12)
Includes primarily long-term standby commitments we have issued and single-family and multifamily credit
enhancements that we have provided and that are not otherwise reflected in the table.
(13)
Unpaid principal balance of: (1) mortgage loans held in our mortgage portfolio; (2) Fannie Mae MBS held in our
mortgage portfolio; (3) non-Fannie Mae mortgage-related securities held in our investment portfolio; (4) Fannie Mae
MBS held by third parties; and (5) other credit enhancements that we provide on mortgage assets. The principal
balance of resecuritized Fannie Mae MBS is included only once in the reported amount.
(14)
Unpaid principal balance of: (1) mortgage loans held in our mortgage portfolio; (2) Fannie Mae MBS held in our
mortgage portfolio; (3) Fannie Mae MBS held by third parties; and (4) other credit enhancements that we provide on
mortgage assets. Excludes non-Fannie Mae mortgage-related securities held in our investment portfolio for which we
do not provide a guaranty. The principal balance of resecuritized Fannie Mae MBS is included only once in the
reported amount.
(15)
Average balances for purposes of the ratio calculations are based on beginning and end of period balances.
(16)
Annualized net interest income for the period divided by the average balance of total interest-earning assets during
the period.
(17)
Annualized guaranty fee income as a percentage of average outstanding Fannie Mae MBS and other guarantees
during the period.
(18)
Annualized (a) charge-offs, net of recoveries and (b) foreclosed property expense, as a percentage of the average
guaranty book of business during the period. We exclude from our credit loss ratio any initial losses recorded on
delinquent loans purchased from MBS trusts pursuant to Statement of Position No. 03-3, Accounting for Certain
Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”), when the purchase price of seriously delinquent loans
that we purchase from Fannie Mae MBS trusts exceeds the fair value of the loans at the time of purchase. Also
excludes the difference between the unpaid principal balance of HomeSaver Advance loans at origination and the
estimated fair value of these loans. Our credit loss ratio including the effect of these initial losses recorded pursuant
to SOP 03-3 and related to HomeSaver Advance loans was 35.1 basis points and 14.9 basis points for the three
months ended months September 30, 2008 and 2007, respectively, and 26.3 basis points and 8.0 basis points for the
nine months ended September 30, 2008 and 2007, respectively. We previously calculated our credit loss ratio based
on credit losses as a percentage of our mortgage credit book of business, which includes non-Fannie Mae mortgage-
related securities held in our mortgage investment portfolio that we do not guarantee. Because losses related to non-
Fannie Mae mortgage-related securities are not reflected in our credit losses, we revised the calculation of our credit
loss ratio to reflect credit losses as a percentage of our guaranty book of business. Our credit loss ratio calculated
based on our mortgage credit book of business would have been 28.4 basis points and 5.0 basis points for the three
months ended September 30, 2008 and 2007, respectively, and 19.1 basis points and 4.0 basis points for the nine
months ended September 30, 2008 and 2007, respectively.
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24. (19)
Annualized net income (loss) available to common stockholders divided by average total assets during the period,
expressed as a percentage. This ratio, which is considered a profitability measure, is a measure of how effectively we
deploy our assets.
(20)
Annualized net income (loss) available to common stockholders divided by average outstanding common equity
during the period, expressed as a percentage. This ratio, which is considered a profitability measure, is a measure of
our efficiency in generating profit from our equity.
(21)
Average stockholders’ equity divided by average total assets during the period, expressed as a percentage. This ratio,
which is considered a longer term solvency measure, is a measure of the extent to which we are using long-term
funding to finance our assets.
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25. DESCRIPTION OF OUR BUSINESS
Our Role in the Secondary Mortgage Market
Fannie Mae is a government-sponsored enterprise chartered by Congress to support liquidity and stability in
the secondary mortgage market, where existing mortgage loans are purchased and sold. We do not make
mortgage loans to borrowers or conduct any other operations in the primary mortgage market, which is where
mortgage loans are originated.
The Federal National Mortgage Association Charter Act sets forth the activities that we are permitted to
conduct and states that our purpose is to:
• provide stability in the secondary market for residential mortgages;
• respond appropriately to the private capital market;
• provide ongoing assistance to the secondary market for residential mortgages (including activities relating
to mortgages on housing for low- and moderate-income families involving a reasonable economic return
that may be less than the return earned on other activities) by increasing the liquidity of mortgage
investments and improving the distribution of investment capital available for residential mortgage
financing; and
• promote access to mortgage credit throughout the nation (including central cities, rural areas and
underserved areas) by increasing the liquidity of mortgage investments and improving the distribution of
investment capital available for residential mortgage financing.
We securitize mortgage loans originated by lenders in the primary mortgage market into Fannie Mae MBS,
which can then be readily bought and sold in the secondary mortgage market. We describe the securitization
process below under “Business Segments—Single-Family Credit Guaranty Business—Mortgage
Securitizations.” We also participate in the secondary mortgage market by purchasing mortgage loans and
mortgage-related securities, including our own Fannie Mae MBS, for our mortgage portfolio. By selling loans
and mortgage-related securities to us, lenders replenish their funds and, consequently, are able to make
additional loans.
Although we are a corporation chartered by the U.S. Congress, the U.S. government does not guarantee,
directly or indirectly, our securities or other obligations. It should be noted that, as described in “Executive
Summary” above, pursuant to the Housing and Economic Recovery Act of 2008, Congress authorized
Treasury to purchase our debt, equity and other securities, which authority Treasury used to make its
commitment under the senior preferred stock purchase agreement to provide up to $100 billion in funds as
needed to help us maintain a positive net worth (which means that our total assets exceed our total liabilities,
as reflected on our GAAP balance sheet). In addition, we may request loans from Treasury under the Treasury
credit facility.
Our Customers
Our principal customers are lenders that operate within the primary mortgage market, where mortgage loans
are originated and funds are loaned to borrowers. Our customers also include mortgage banking companies,
savings and loan associations, savings banks, commercial banks, credit unions, community banks, insurance
companies, and state and local housing finance agencies.
Lenders originating mortgages in the primary mortgage market often sell them in the secondary mortgage
market in the form of whole loans or in the form of mortgage-related securities.
During the third quarter of 2008, our top five lender customers, in the aggregate, accounted for approximately
60% of our single-family business volume, compared with 56% for the third quarter of 2007. Three lender
customers each accounted for 10% or more of our single-family business volume for the third quarter of 2008:
Bank of America Corporation and its affiliates, JPMorgan Chase and its affiliates and Wells Fargo &
Company and its affiliates.
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26. Our top lender customer is Bank of America Corporation, which acquired Countrywide Financial Corporation
on July 1, 2008. Because the transaction has only recently been completed, it is uncertain how the transaction
will affect our future business volume. Our single-family business volume from the two companies has
decreased compared to the third quarter of last year. Bank of America Corporation and its affiliates, following
the acquisition of Countrywide Financial Corporation, accounted for approximately 20% of our single-family
business volume for the third quarter of 2008. For the third quarter of 2007, Countrywide Financial
Corporation and its affiliates accounted for approximately 25% of our single-family business volume and Bank
of America Corporation accounted for approximately 5% of our single-family business volume.
Due to increasing consolidation within the mortgage industry, as well as a number of mortgage lenders having
gone out of business since late 2006, we, as well as our competitors, seek business from a decreasing number
of large mortgage lenders. As we become more reliant on a smaller number of lender customers, our
negotiating leverage with these customers decreases, which could diminish our ability to price our products
and services profitably. We discuss these and other risks that this customer concentration poses to our business
in “Part II—Item 1A—Risk Factors.”
Business Segments
We are organized in three complementary business segments: Single-Family Credit Guaranty, Housing and
Community Development, and Capital Markets.
Single-Family Credit Guaranty Business
Our Single-Family Credit Guaranty business (which we also refer to as our Single-Family business), works
with our lender customers to securitize single-family mortgage loans into Fannie Mae MBS and to facilitate
the purchase of single-family mortgage loans for our mortgage portfolio. Single-family mortgage loans relate
to properties with four or fewer residential units. Revenues in the segment are derived primarily from guaranty
fees received as compensation for assuming the credit risk on the mortgage loans underlying single-family
Fannie Mae MBS and on the single-family mortgage loans held in our portfolio.
Mortgage Securitizations
Our most common type of securitization transaction is referred to as a “lender swap transaction.” Mortgage
lenders that operate in the primary mortgage market generally deliver pools of mortgage loans to us in
exchange for Fannie Mae MBS backed by these loans. After receiving the loans in a lender swap transaction,
we place them in a trust that is established for the sole purpose of holding the loans separate and apart from
our assets. We serve as trustee for the trust. Upon creation of the trust, we deliver to the lender (or its
designee) Fannie Mae MBS that are backed by the pool of mortgage loans in the trust and that represent a
beneficial ownership interest in each of the loans. We guarantee to each MBS trust that we will supplement
amounts received by the MBS trust as required to permit timely payment of principal and interest on the
related Fannie Mae MBS. We retain a portion of the interest payment as the fee for providing our guaranty.
Then, on behalf of the trust, we make monthly distributions to the Fannie Mae MBS certificateholders from
the principal and interest payments and other collections on the underlying mortgage loans.
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